Spread Trading Handbook

What’s the point of paying good money for books about financial spread betting? All things said, pretty much every spread betting provider in town is more than willing to give you a glossy little ring-binder with all the details on the workings of spreadbetting when you open your spread betting account, and usually a series of webinars and recorded seminars are thrown in the mix as well. And then there are the countless articles available around for free on the internet. However, even with all the free education that’s currently available for would-be spreadbetters, I believe there’s still a solid case for starting out with a really decent book. There’s just something more ‘personal’ about a trading guide written by someone who’s been through it all already rather than some trading manual that’s been ruthlessly edited by the spread-betting provider’s eagle-eyed compliance legal officers.

“The losses, the costs of the courses, the books, the magazines – I look at as an investment in my education. I make a loss, I try and learn from it, it’s then not so much a loss as money invested – in me. I intend to be doing this for years to come and intend to teach others the lessons I’ve learned, after all this is a marathon not a sprint.”

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If you’re going to start spread trading in the earnest, then you need to make sure that you are well educated on both the techniques of spread betting and the different market characteristics. Spread trading books are a very popular way of studying these aspects at your own pace, and in your own time.

There are two types of books — the first one like the ‘The Naked Trader’s Guide to Spread Betting’ (by Robbie Burns) is for the novice spread better, and it explains the mechanics of spread betting, the flexibility available, and general principles of trading. Often that there will be a strategies, but you shouldn’t expect that this will be cutting edge. This represents the type of learning that you need to have under your belt before you can realistically start trading real money in your account. You can also get this sort of training from some of the spread betting providers, although it is often in the form of training videos where you need to be in front of your computer to study.

The second type of book like Winning Spread Betting Strategies (this one by Malcolm Pryor) will be much more useful for you when you have developed a general understanding, but are looking to improve your performance. This type of book will run through more advanced techniques, and these discussions will lead you to a trading plan that will suit your personality, your time restraints, and your budget. Often these will be written by specialists in spread trading, and you will see the same names recur again and again. They may also invite you to subscribe to a regular newsletter to keep updated.

For instance, one of Malcolm’s simpler theories is based on ADX which I found quite interesting…

A – Go long when ADX is 30 and above and D1+ is greater than D1- and go short when ADX above 30 and D1- is greater than D+. Should state however that additional setup criteria has to be satisfied before an actual spreadbet is placed – too detailed for here, all in the book however.

Once you are somewhat experienced, you need to be careful that you do not invest in the first type of book, as this will do little to help you and may even be wasting your time. Make sure that you read the book’s synopsis, as well as reviews which will give you an indication of how advanced the contents are. Typically, you’re not going to find one book which leads the novice from setting up an account all the way up to advanced techniques.

While spread trading may be your focus, if you only buy books about spread trading then you may be missing out on a great deal of useful information. Spread bets are available on many different underlying markets, including stocks and shares, foreign exchange, commodities or futures, interest rates, and other things. How the prices of those underlying financial instruments change is what determines your profitability in spread betting.

Therefore, once you are past the beginning stages, it makes great sense to widen your range, and purchase or borrow books which cover specific markets. For instance, there’s no shortage of books written about Forex where you can learn how to read the markets and anticipate currency exchange movements. Similarly, there are many books written about futures and options, and this is another choice that you have with many brokers when you’re spread betting. Spread trading books can give you information on specific betting techniques, but your trading will improve significantly when you achieve a better understanding of the underlying financial instruments.

The general trading books I would consider reading are;

Reminiscences of a Stock Operator

Trading in the Zone by Mark Douglas

Market Wizards

The New Market Wizards by Jack Schwager

Random Walk Down Wall St.

Pit Bull by Marty Schwartz.

The last book heavily argues against frequent trading and theorises that buy and hold leads to greater investments. None the less it has good ideas in it and can at least point out some of the pitfalls other investors have.

To summarise key points from the 3 books.
“Sit tight and be right” – Reminisces of a Stock Operator
– If you have a winner and it is indeed still going your way then don’t be content with just taking your winnings, stay with it. It is all too easy for emotions to get the better of you and for you to just take your quick profit.

“Losers Average Losers” – Market Wizards
– You will often come across people who if they are long of a position and it goes against them will increase their position even more, thus averaging out their loss or they might still see it as a bargain. In a lot of instances (majority in my opinion) it’s just throwing good money after bad. What you will see less of is when their position is in their favour people increasing their position. As such I agree with their statement that losers average losers and winners average winners. Also despite what some people say, there is no such thing as a paper loss.

Alexander Elder’s “Trading for a Living” is also worth a read, particularly if you trade using technical analysis.

Just remember though, I think it is only 20% of people involved with spread betting actually make a profit. From talking to my friend that works in IG Index it seems even less. As far as I understand, the reason it’s not taxed is because so many people lose they could use their losses as tax deductibles and there would be lost revenue to the exchequer. The reason most people lose is the same reason most people lose at gambling. no discipline. when you give your money to a fund mgr to manage it you can’t personally close the positions, you can when you spread bet so emotions take over and you make the wrong decisions.

“Reading spread betting and general trading books is fine but they can’t talk back if you don’t understand something.”

Another interesting read is Markets Never Forget – But People Do. How You’re Memory Is Costing You Money – and Why This Time isn’t Different” by Ken Fisher. The book is USA based mainly though considers a lot of global economic issues and written by a pure fundamentalist. He preaches that “Investing isn’t a certainties game or a possibilities game; it’s a probabilities game.” He seeks to dispel myths which we regularly see in the media and from analysts by showing from history examples of previous occurrences and why what is often widely predicted to happen often has no historical basis. Interestingly, as the book was published in the middle of 2011 it is well up to date and he discusses the USA and PIIGS and debt in particular as well as “double-dip” recession threats etc. He points out from history that it is not the level of debt relative to GDP but the cost of servicing that debt. He shows that it is not deficits that are bad for the market but surpluses (for example UK debt as a percentage of GDP was higher than 100% from 1750 to 1850, above 150% for half that period and peaked at 250% and that US debt interest payments as a percentage of GDP are at around 2%, but for the period of 1979 to 2002 it was above this level and sat around 4% for most of that period which included two mega bulls in the 80s and 90s). He also shows that the 3rd year of a bull market is often a meagre return year, averaging 4% in each bull market since 1932 calling it the “third year pause” – of these nearly half were down years as much as 10%.

Other stock market investment books;

Invest With Success – Big Profits for Small Investors

by Dr Charles Schaap

Dr Schaap does a great job in explaining how the market works, what shares to buy, when to buy, when to sell, and a whole lot more.

By the time you’ve finished reading the book you’ll understand the author’s 50-50 Strategy. A complete long-term trading system that covers everything from stock selection, entries, exits, and money management.

If you’re interested in learning a sensible trading system, read Invest With Success.

Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets

The idea is to find stocks that have the best chance of developing a strong long-term trend so that you can ride it from the bottom of the cycle to the top.

He concentrates on the things that really matter and leaves out the rest. If you’re new to technical analysis you’ll get a good grounding in the basics and learn a great trading system as well. This is a practical book with ideas that can applied.

Recommendation: 5/5 stars

Trading in a Nutshell

by Stuart McPhee

Stuart McPhee holds nothing back. He is very generous in the way that he shares his knowledge.

What is refreshing about this author is how he instructs the reader to focus on the essential elements of successful trading.

Some of the highlights of the book include:
– the key principles of trading successfully
– the importance of developing and following a trading plan
– thorough money management principles, and
– astute observations and key insights into the practical nature of trading

The lessons in this book are similar to a driver’s license. You shouldn’t drive without a license, nor should you trade without a plan. This book will help you to create the plan.

Here is a link to the Trading in a Nutshell website where you will find some video previews from the bonus CD that come with the book.

Recommendation: 5/5 stars

The Five Rules For Successful Stock Investing

by Pat Dorsey

Pat Dorsey, the Director of Stock Analysis at Morningstar explains how to select and analyze investment quality stocks. The ideas and techniques discussed in this book are second to none.

Communicating in clear and precise way, he gets straight to the point describing the Morningstar methodology which aims to discover a company’s true performance and investment potential.

The first half of the book describes the method, while the second half applies the theory to stocks in the individual sectors of the market. The application of the theory to stocks in the different market sectors makes this book stand out amongst the competition. It is very thorough and practical.

The quality of the ideas, the depth of the information covered, and the industry sector analysis section of this book makes it great value for money.

Recommendation: 5/5 stars

The Little Book That Beats The Market

by Joel Greenblatt

Joel Greenblatt is an investing super star. His investment company averaged a 40% annual return for a twenty year period.

What I like about Joel is that he keeps his approach simple. In fact, he wrote this book for his children so they could learn how to invest.

This book is based on what Joel calls the “Magic Formula”. A simple formula that finds good companies trading a cheap prices. The approach he advocates is mechanical, where you buy a number of stocks meeting the magic formula. You hold them for 12 months, and then sell them.

The approach is sound, but it does require you to invest for the long term, and to realize that not all years will be profitable with this system.

As a means for screening the market for winners, the magic formula is hard to beat. If you apply some additional analysis (as taught in our Stock Market Tutorial) you’ve got a winning method.

Recommendation: 5/5 stars

The Intelligent Investor

by Benjamin Graham

This book has been a favorite with investors ever since it was first published in 1950. Benjamin Graham is known as the “father of value investing”. His ideas have shaped some of the best investors of all time, including his student Warren Buffett.

Don’t be put off by the age of this book. The concepts it describes are just as relevant today as when they were first written.

Some of the ideas discussed in the book include:

The difference between investing and speculating

Margin of safety

Market psychology

Fundamental analysis

The importance of a company having a history of making money

Quality of earnings

Acting as though you’re buying the whole business

Stock selection criteria for investors with differing risk appetites

Although some of the chapters do require you to exercise tenacious attention in order to follow what’s being discussed, this book provides valuable information for the investor.

Recommendation: 5/5 stars

One Up On Wall Street

by Peter Lynch

Peter Lynch was one of America’s most successful fund managers. Over a 13 year period starting in 1977 his Magellan fund averaged a whopping 29% annual return, making it the best performing fund in the world.

This book is full of wisdom and you’ll walk away after reading it with some practical, down to earth ideas that can be applied straight away.

One of the main ideas in the book is that of buying into companies that you already know something about. It’s split into three sections covering the author’s methodology. The section on “Picking Winners” is my favorite.

Recommendation: 5/5 stars

The 5 Keys To Value Investing

by J. Dennis Jean-Jacques

The author is a professional value investor and has worked with the best at Fidelity Investments. He presents a sensible methodology for picking stocks and goes beyond the basics to present the reader with a realistic approach.

The book is only 200 or so pages but contains a wealth of knowledge for the intermediate investor.

Recommendation: 5/5 stars

Value Investing Made Easy

by Janet Lowe

The nice thing about this little book is that it explains the underlying value investing principles simply.

This book is a good way to get to know Benjamin Graham’s ideas, without reading his other works which require a more strenuous approach on the part of the reader.

Recommendation: 4/5 stars

The Contrarian Investor’s Thirteen

by Benj Gallander

Benj Gallander is a Canadian investor with some useful ideas. Of note are his method of setting target sell prices based on an analysis of a company’s 10 year share price spread.

He puts forward a “Purchase Weighting System” that investors can use to decide how much investment capital to put into individual investments. He also introduces his “Point Tally System” that’s used to assess a stock before you purchase it.

Overall, it provides some practical ideas that beginners will find useful.